Time Warner CFO: Home Entertainment Market ‘Particularly Encouraging’

Second season ‘Game of Thrones’ release generates highest first-day home entertainment sales for an HBO series

Positive first-quarter home entertainment results suggest the market has turned its back on eroding sales and consumer confidence, said Time Warner CFO John Martin.

In a May 1 fiscal call, Martin said electronic sellthrough was up 60% in the quarter year-over-year, underscoring an overall equilibrium in the market.

“It’s particularly encouraging to see these signs of stabilization even as some of the industry’s digital initiatives, including UltraViolet, remain at a relatively early stage,” he said.

Strong home entertainment sales of The Hobbit: An Unexpected Journey and Argo contributed to Warner Bros. May 1 reporting first-quarter (ended March 31) operating income of $263 million, up 23% from operating income of $214 million during the previous-year period.

The studio, which includes Warner Bros. Home Entertainment Group and Warner Home Video, said The Hobbit topped $1 billion in the global box office, making it the fourth biggest film in its history.

Home entertainment revenue from theatrical movies increased 2% to $477 million, while revenue from TV programming, including subscription video-on-demand licensing, increased 8% to $205 million from $189 million last year.

Electronic sellthrough revenue increased 20% year-over-year to $75 million. Digital sellthrough and transactional VOD revenue represented close to $200 million in revenue, according to Martin, adding that when combining the segments with SVOD, represented $1 billion in revenue in 2012.

“Those three forms are already big, and frankly, that’s one of the reasons why we’ve seen stabilization in the overall home entertainment market,” he said.

CEO Jeff Bewkes said the Blu-ray Disc/DVD boxed set Game of Thrones: The Complete Second Season generated the highest first-day retail sales (including electronic sellthrough) of any HBO series ever. The boxed set was released Feb. 19.

Meanwhile, SVOD license deals with Netflix, Amazon Prime and LoveFilm Instant, among others, generated $75 million in revenue, with the majority of it coming from foreign territories. Another $25 million in SVOD revenue came from licensing Turner Networks content.

The SVOD revenue disclosure comes the day more than 1,700 titles from Warner, Universal and MGM ceased streaming on Netflix due to expiring license agreements. Warner is transferring most of its undisclosed movies to its SVOD service, Warner Archive Instant.

Regardless, Martin said Warner should exceed the $350 million in SVOD revenue generated in 2012.

“We expect the SVOD channel to be a significant contributor to our results this year,” he said.

Bewkes said SVOD revenue should be kept in perspective, considering it represents less than 10% of Warner Bros. Television’s quarterly revenue, and 3% of total film and TV revenue.

The CEO added that Netflix and other streaming services remain complementary to HBO, which each premium-TV service “over-indexing” in respective households. He reiterated that there are no plans to make HBO available as a standalone subscription service in the United States, due to the fact HBO and Cinemax have a combined 40 million subscribers in the country.

“We don’t think it makes sense. We don’t think the target market is sufficiently large enough at this point,” Bewkes said, adding HBO has the lowest churn (subscriber non-renewal) of any premium-TV service. “We’ll always keep evaluating it depending on the country.”